Just when you thought the McDonald's model had run its course in every industry, there is now a US company snapping up Internet service providers (ISPs) around the country and turning them into franchises.
HotKey, a wholly owned subsidiary of US carrier Primus, has arranged for the creation of 10 franchise operations out of small regional Australian ISPs. The company has recently integrated Mildura ISP Ozland, Victorian ISP Portland and Sale ISP Gippsland into a consolidated network, and come to similar arrangements to integrate Adelaide ISPs Triple-I and Third Rock Internet, as well as Spencer Gulf ISP Gulf Internet.
HotKey has a separate board and management to Primus Australia, but uses the Australian carrier's network infrastructure. The company approaches small ISPs, buys their customer databases, and uses Primus Australia's infrastructure to connect them to a nationwide network.
Managing director Campbell Sallabank said HotKey seeks the biggest and best ISP in a given regional area and pays an up-front transaction to acquire the ISP's customers. This transaction, he said, was generally less than the market value of the ISPs, as their owners continue to hold a saleable asset. HotKey integrates the ISP's data into its databases, shuts the ISP's points of presence down, and sends a message to the ISP's customers which enables them to change over to the HotKey network at the push of a button.
The owner of the ISP then runs a HotKey franchise and pays HotKey a 20 per cent royalty, a 5 per cent marketing charge and a series of other charges for network access and other value-added services. The franchisee generally ends up with a set margin of around 35-40 per cent.
While the ISP loses the ownership of its customer base and the majority of its margins, Sallabank suggests it still ends up financially better off. "At least their costs are fixed and known - that's got to be better than being at Telstra's whim," he said. "The ISPs also get to double their customer base - we give them access to a carrier grade network, marketing material and a wider area to serve customers," he said. "We help them establish a regionally dominant position.
"We let the carriers roll out the infrastructure and we do the marketing and the value-added application services," said Sallabank. "The franchisees become the human face of HotKey. They handle the helpdesk, the account enquires and the local marketing."
Sallabank believes regional and other small ISPs are stuck in a rut that they would gladly sell out of if anyone was interested in buying, so the franchise offer is generally well received.
But what the franchise agreement also takes away is control of the customer. HotKey owns the customers. The terms of the agreement suggests the owner can sell the franchise, but only as a HotKey franchise. The owner cannot change heart and return to being an independent ISP.
The HotKey brand must then remain solid if these franchise owners are to own an asset of any value. Sallabank insists that the real value lies in the value-added services HotKey provides its franchise owners, which are negotiated en masse by HotKey to offer the ISPs good margins. There are several services available for resale apart from the core combination of dial-up, ISDN, ADSL, microwave and satellite Internet access services. For an additional monthly cost, franchisees can sell a variety of mail and messaging services.
There are about 40 slots left in the country where Sallabank wishes to divide and conquer. Essentially the company will continue to acquire customers from existing ISPs until it covers the country. "We are out to dumb down Internet access. We design the hamburgers and plan the menu, then we show them how to price the burgers and market the burgers," he said.
